PC's last push and Modi pull are bringing economy out of the ditch; industry is reviving

The tenuous link between post-election business optimism and actual industrial revival is now proving to be stronger.

In recent weeks, many of the signals on the industrial front have been positive. Consider:

One, the core sector growth numbers for June showed a sharp uptick to 7.3 percent, a nine-month high. The core sector, comprising crude oil, gas, petro-products, coal, power, steel, fertiliser and cement, accounts for 38 percent of the Index of Industrial Production (IIP).

Two, the HSBC purchasing managers' index (PMI) sent a bullish signal once again by rising to a 17-month high in July 2014. The index rose to 53, up 1.5 percent from June, indicating a huge improvement in industrial orders and business sentiment. Any score above 50 indicates an expansionary tendency - and 53 is clearly solidly expansionary in terms of intent.

Three, the IIP itself has been on an uptrend since April (see table), after staying flat or negative for most of the previous half year or more. Last September, when the IIP saw its last major upmove at 2.7 percent, has been topped by both April and May at 3.4 percent and 4.7 percent. Industry is surely reviving.

Four, export growth, which was in low single digits for most months after October 2013, and even dipping into negative territory in February and March this year, started reviving from April and spiked to double-digits in May and June, with 12.4 percent and 10.2 percent growth.

Anecdotally, it is clear that many industries are on the uptrend, with automobiles - now on artificial boosters with excise cuts - leading the pack. While market leader Maruti saw sales rising 20 percent, Hyundai reported 13 percent and Honda a whopping 40 percent. The losers were Tata Motor, GM, Ford and M&M, but their losses were more than made up by those who gained market share - leaving the industry with a clean 11 percent plus sales rise among those who reported numbers for July so far, according to data compiled by BusinessLine.

In two-wheelers, the picture is similar with the big two, Hero and Honda, registering positive growth. Bajaj Auto and TVS numbers were not in at the time of writing.

The only area of worry in the auto sector is commercial vehicles, where three major players - Tata Motors, M&M, Ashok Leyland - reported a drop in sales. Clearly, there is enough spare capacity in truck fleets to take care of short-term increases in cargo movement as a result of higher industrial activity. Commercial vehicle sales can be expected to revive by October-November, the start of the traditional busy season, if the IIP uptrend continues.

In the coming week, one can expect a better IIP number as there is usually a positive correlation between core sector growth and IIP numbers. The core sector, after all, produces stuff used by other parts of industry or final consumers, and if its output is up, it has to mean higher output in general.

Since September 2013, core sector growth has been positive in all but one month (October 2013); IIP has been positive or flat only half the time.

One reason for this could be the high level of unused capacities in factories, which means IIP will pick up only after a lag, once the existing spare capacity gets used up with rising demand.

But achche din for industry cannot be far away as exports too have started reviving from this financial year.

This is the result of hard work during the final months of P Chidambaram's stewardship of the economy, but equally due to the optimism generated by the impending rise of Narendra Modi's on the national stage, and his installation as Prime Minister from 26 May.

(Data support by Kishor Kadam)

Updated Date: Aug 02, 2014 14:15:52 IST